July was characterized by persistent higher-for-longer interest rate expectations, resilient economic activity, and healthy capital markets debt issuance, particularly related to artificial intelligence (AI) infrastructure. U.S economic data continued to demonstrate underlying strength despite ongoing geopolitical tensions and elevated energy prices. Inflation remained above the Federal Reserve's (Fed's) target, supported in part by continued AI-related pricing pressures, while labor market conditions stayed firm. Against this backdrop, the Fed held policy rates unchanged at its July meeting. Continued dissents in favor of tighter policy, along with Federal Open Market Committee (FOMC) Chairman Warsh’s "less is more" communication approach, reinforced uncertainty around the future path of monetary policy. U.S. Treasury yields moved higher during the month, with longer-dated maturities underperforming the front end as the yield curve steepened. The markets are currently pricing in 1-2 rate hikes by year-end, which contrasts with the beginning of 2026 when the markets were expecting 2 rate cuts by year end. The 2-year U.S. Treasury closed the month at 4.28%, the 10-year rate finished at 4.73%, while 30-year U.S. Treasury bonds ended at 5.27%, the highest rate level since 2007.
Agency mortgage-backed securities underperformed U.S. Treasuries during the month, as higher interest rates and increased volatility weighed on valuations and kept investors on the sidelines. The Fund maintains an overweight position in the sector, reflecting its attractive yields. Within the allocation, the Fund favors mortgage securities with shorter average lives, which provide some protection against rising rates and volatility.
